 "The earnings environment has improved: Manishi Raychaudhuri")
Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas, the multinational financial services company, talks to Ujjval Jauhari on the post-Budget mood of foreign investors, their concerns, expected fund flows, the economy and sectoral performance. Edited excerpts:
How is the mood of investors after Budget?
Immediately after it, people were relatively disappointed. They then slowly understood that the present government's hands are tied and there are limitations regarding revenue raising. The plan to reduce subsidies is also not so easy. And, many steps the government needs to take are outside the purview of the current Budget.
So, how are international clients looking at India?
When we talk to long-term investors from the UK, Europe or Asia, it becomes apparent that India is a better growth story than many other emerging markets (EMs). For example, unlike China where the growth trajectory is slowing, India’s growth has actually bottomed out and is beginning to recover. India has a scenario where earlier problems like the current account deficit are reversing. Also, the policy environment has changed substantially with the advent of the Modi government. That said, other EMs are also seeing positive triggers, like the outcome of Indonesia’s recent election; Brazil will have had elections by the end of the year. Thus, there are anticipated triggers for other geographies but investors acknowledge that the transition in India has already taken place.
How grave are the foreign institutional investor concerns on the issues of anti-avoidance tax rules, retrospective taxation, etc?
The concerns remain and stronger pronouncements would have helped. Though, the finance minister later explained that
some cases are in process and the government needs to let these reach logical ends before issues are addressed. Until then, investors will have to live with a few unanswered questions in the near term.
How will be the fund flows to India?
In the very near term, I expect some foreign outflow or some slowing in inflows. One, the recent re-rating of the Indian market has led to India trading at valuation premiums of 20-25 per cent, compared to Asia and Japan. India has always traded at a premium but it is now above the long-term average. Two, the macro catalyst of the election results is now behind us. Three, some of the other EMs are beginning to look attractive, so some diversion of funds in the near term might happen.
However, these are short-term factors and investors will also be looking at India’s quarterly results. These are likely to be reasonably good, as has been the case with recent results. The earnings environment has improved.
How do you see US and European growth, and its possible impact on India?
There are renewed concerns in Europe but the uncertainty seems confined to Portugal, so it might not impact global valuations as we saw earlier. The US unemployment data and job creation data show recovery is in process but much below expectations. If that continues, the expectation and timeline for interest rates increases starting mid-2015 might get pushed out. This could be good news in terms of liquidity but not such good news in terms of growth. It might also not be good news for a few sectors, such as information technology, which might not see the expected recovery (though, as of now, we are not really bearish on this).
What are the other domestic and global risks?
Investors should watch carefully for an extended US slowdown, renewed problems in the European Union and geopolitical risks which could push up international oil prices -- which play an especially important role in the Indian context.
In the domestic context, clients are concerned about the impact of the monsoon and related food inflation. If fresh food inflation starts adding fuel to the fire, the downward cycle in interest rates might get further delayed. The consensus expectation remains that the Reserve Bank will touch interest rates in the first half of next year.
What are the expected returns from the Sensex?
We have a target of 28,000 by the end of the year, up slightly from the current 25,000. This means we expect slightly more than a 20 per cent return for the year. This might seem a bit ambitious but the earnings environment has turned around. For the past seven years, we have mostly seen single-digit earnings growth – this has changed. For fiscal 2015 and 2016, we think earnings growth of 15-20 per cent is quite possible, which would mean that current valuations are sustainable.
How is the mood of investors after Budget?
Immediately after it, people were relatively disappointed. They then slowly understood that the present government's hands are tied and there are limitations regarding revenue raising. The plan to reduce subsidies is also not so easy. And, many steps the government needs to take are outside the purview of the current Budget.
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Clients are now viewing the Budget as pragmatic and realise that many things could happen which are not mentioned in it. For instance, starting the investment cycle means expediting a lot of approvals and it is necessary to tweak earlier legal provisions such as those in the land acquisition bill. These will likely be tackled after the Budget. Investors are now becoming less disappointed.
So, how are international clients looking at India?
When we talk to long-term investors from the UK, Europe or Asia, it becomes apparent that India is a better growth story than many other emerging markets (EMs). For example, unlike China where the growth trajectory is slowing, India’s growth has actually bottomed out and is beginning to recover. India has a scenario where earlier problems like the current account deficit are reversing. Also, the policy environment has changed substantially with the advent of the Modi government. That said, other EMs are also seeing positive triggers, like the outcome of Indonesia’s recent election; Brazil will have had elections by the end of the year. Thus, there are anticipated triggers for other geographies but investors acknowledge that the transition in India has already taken place.
How grave are the foreign institutional investor concerns on the issues of anti-avoidance tax rules, retrospective taxation, etc?
The concerns remain and stronger pronouncements would have helped. Though, the finance minister later explained that
some cases are in process and the government needs to let these reach logical ends before issues are addressed. Until then, investors will have to live with a few unanswered questions in the near term.
How will be the fund flows to India?
In the very near term, I expect some foreign outflow or some slowing in inflows. One, the recent re-rating of the Indian market has led to India trading at valuation premiums of 20-25 per cent, compared to Asia and Japan. India has always traded at a premium but it is now above the long-term average. Two, the macro catalyst of the election results is now behind us. Three, some of the other EMs are beginning to look attractive, so some diversion of funds in the near term might happen.
However, these are short-term factors and investors will also be looking at India’s quarterly results. These are likely to be reasonably good, as has been the case with recent results. The earnings environment has improved.
How do you see US and European growth, and its possible impact on India?
There are renewed concerns in Europe but the uncertainty seems confined to Portugal, so it might not impact global valuations as we saw earlier. The US unemployment data and job creation data show recovery is in process but much below expectations. If that continues, the expectation and timeline for interest rates increases starting mid-2015 might get pushed out. This could be good news in terms of liquidity but not such good news in terms of growth. It might also not be good news for a few sectors, such as information technology, which might not see the expected recovery (though, as of now, we are not really bearish on this).
What are the other domestic and global risks?
Investors should watch carefully for an extended US slowdown, renewed problems in the European Union and geopolitical risks which could push up international oil prices -- which play an especially important role in the Indian context.
In the domestic context, clients are concerned about the impact of the monsoon and related food inflation. If fresh food inflation starts adding fuel to the fire, the downward cycle in interest rates might get further delayed. The consensus expectation remains that the Reserve Bank will touch interest rates in the first half of next year.
What are the expected returns from the Sensex?
We have a target of 28,000 by the end of the year, up slightly from the current 25,000. This means we expect slightly more than a 20 per cent return for the year. This might seem a bit ambitious but the earnings environment has turned around. For the past seven years, we have mostly seen single-digit earnings growth – this has changed. For fiscal 2015 and 2016, we think earnings growth of 15-20 per cent is quite possible, which would mean that current valuations are sustainable.